1987 (7) TMI 168 - AT - Income Tax

Summary

Issues Involved:
1. Nature of the precious stones received by the assessee from the bigger HUF.
2. Entitlement of the assessee to deduction under Section 80T.
3. Conversion of capital asset into stock-in-trade.
4. Applicability of capital gains tax on the conversion and subsequent introduction into the firm.
5. Consideration of the Supreme Court decisions and their implications on the case.

Detailed Analysis:

1. Nature of the Precious Stones Received by the Assessee from the Bigger HUF:

The primary issue was whether the precious stones received by the assessee from the bigger HUF consequent to a partition on 15th March 1976 were in the nature of a capital asset. The learned Senior Departmental Representative argued that the assessee must provide evidence that the asset was a capital asset. The bigger HUF had made a disclosure under the Voluntary Disclosure Scheme in 1975, and the partition included these precious stones. The assessee claimed that since the bigger HUF had discontinued its business years earlier, the assets disclosed were capital assets. The AAC concluded that the asset was a capital asset, taxable under capital gains tax, referencing Section 2(42) for the period of holding. The Tribunal agreed with the AAC, noting that the nature of the asset in the hands of the assessee remained that of a capital asset.

2. Entitlement of the Assessee to Deduction under Section 80T:

The assessee argued that the precious stones were capital assets and that he was entitled to deductions under Section 80T. The Tribunal noted that the evidence supporting the capital asset nature was available in the order of the CIT under Section 8(2) of the Voluntary Disclosure Scheme, which provided acquisition dates and values. The Tribunal affirmed that the assets were capital assets, and their cost for capital gains tax purposes would be the same as in the hands of the HUF, as per Section 49(2)(ii).

3. Conversion of Capital Asset into Stock-in-Trade:

The assessee contended that he converted the precious stones into stock-in-trade on 25th March 1976 and introduced them into the business of the firm M/s Rawats where he was a partner. He cited the Supreme Court decision in CIT vs. Bai Shirinbai K. Kooka, which held that such conversion did not result in capital gains as the asset remained with the assessee. The Tribunal noted that the amendment to Section 2(47) effective from 1st April 1985, which included conversion into stock-in-trade as a transfer, did not apply to the assessment year 1976-77. Therefore, the conversion did not result in capital gains.

4. Applicability of Capital Gains Tax on the Conversion and Subsequent Introduction into the Firm:

The Tribunal considered whether the introduction of the asset into the firm resulted in a transfer attracting capital gains tax. The Supreme Court in Sunil Siddharthbhai vs. CIT held that the introduction of assets into a firm by a partner did not result in capital gains, as the credit to the partner's capital account was a notional figure. The Tribunal agreed, noting that the firm was found to be genuine, and the transaction was real. Therefore, the provisions of capital gains tax were not applicable.

5. Consideration of the Supreme Court Decisions and Their Implications on the Case:

The Tribunal extensively referred to Supreme Court decisions, including CIT vs. Bai Shirinbai K. Kooka and Sunil Siddharthbhai vs. CIT. The Tribunal noted that the conversion of a capital asset into stock-in-trade did not result in capital gains, and the introduction of the asset into the firm did not constitute a transfer attracting capital gains tax. The Tribunal concluded that the entire transaction did not attract the provisions of capital gains tax, dismissing the departmental appeal and partly allowing the assessee's appeal.

Conclusion:

The Tribunal held that the precious stones were capital assets, and their conversion into stock-in-trade did not result in capital gains. The introduction of these assets into the firm did not attract capital gains tax, following the Supreme Court's decisions. The departmental appeal was dismissed, and the assessee's appeal was allowed in part.